How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation

27 Pages Posted: 7 Jul 2012 Last revised: 6 Jul 2013

See all articles by Quamrul H. Ashraf

Quamrul H. Ashraf

Williams College - Department of Economics

Boris Gershman

American University - Department of Economics

Peter Howitt

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 30, 2013

Abstract

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

Keywords: agent-based computational model, inflation, price dispersion, firm turnover

JEL Classification: C63, E00, E31, E50

Suggested Citation

Ashraf, Quamrul H. and Gershman, Boris and Howitt, Peter, How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (June 30, 2013). Available at SSRN: https://ssrn.com/abstract=2101808 or http://dx.doi.org/10.2139/ssrn.2101808

Quamrul H. Ashraf

Williams College - Department of Economics ( email )

24 Hopkins Hall Drive
Williamstown, MA 01267
United States
(413) 597-2476 (Phone)
(413) 597-4045 (Fax)

HOME PAGE: http://econ.williams.edu/profile/qha1/

Boris Gershman (Contact Author)

American University - Department of Economics ( email )

4400 Massachusetts Avenue NW
Washington, DC 20016-8029
United States

HOME PAGE: http://nw08.american.edu/~gershman/

Peter Howitt

Brown University - Department of Economics ( email )

Box B
Providence, RI 02912
United States
401-863-2145 (Phone)
401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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